22.8 Rental Real Estate Activities
Key Takeaways
Rental income is generally passive income subject to passive loss rules.
$25,000 special allowance for active participants in rental real estate.
Phase-out: $100,000 - $150,000 AGI (50 cents per dollar over $100k).
Real estate professionals can deduct rental losses against active income.
Form 8582 calculates passive activity loss limitations.
Suspended passive losses can be used when property is sold.
Why This Matters for the Exam
Rental real estate has unique passive activity rules with a special $25,000 allowance. The exam tests the allowance, phase-out, and real estate professional exception.
The General Rule: Rental = Passive
Rental activities are per se passive—regardless of how much you participate.
| Activity Type | Classification |
|---|---|
| Rental real estate | Passive (by definition) |
| Active business | Active or passive based on participation |
Passive Loss Limitation
Passive losses can only offset passive income:
| Income Type | Can Offset Rental Losses? |
|---|---|
| Passive income | Yes |
| Active income (wages) | No (with exception) |
| Portfolio income (dividends) | No |
The $25,000 Special Allowance
Exception: Active participants in rental real estate can deduct up to $25,000 of rental losses against active income.
| Requirement | Description |
|---|---|
| Active participation | Make management decisions |
| Ownership | At least 10% ownership |
| AGI limit | Phase-out begins at $100,000 |
Active Participation (Not Material)
Active participation is a lower standard than material participation:
| Active Participation | Description |
|---|---|
| Approve tenants | Make leasing decisions |
| Set rental terms | Determine rent amounts |
| Approve repairs | Authorize maintenance |
| Management decisions | Overall decisions |
You can hire a property manager and still actively participate.
AGI Phase-Out
| AGI | Allowance |
|---|---|
| <$100,000 | Full $25,000 |
| $100,000 - $150,000 | Reduced (50¢ per $1) |
| ≥$150,000 | $0 |
Formula: Allowance = AGI - $100,000) × 50%]
Phase-Out Examples
| AGI | Calculation | Allowance |
|---|---|---|
| $80,000 | Full | $25,000 |
| $120,000 | $25,000 - ($20,000 × 50%) | $15,000 |
| $140,000 | $25,000 - ($40,000 × 50%) | $5,000 |
| $150,000+ | $25,000 - ($50,000 × 50%) | $0 |
Real Estate Professional Exception
Real estate professionals can deduct all rental losses against active income:
| Requirement | Test |
|---|---|
| 750+ hours | In real property trades or businesses |
| More than 50% | Of personal services in real estate |
| Both tests | Must meet BOTH |
Real Property Trades or Businesses
| Qualifies | Does Not Qualify |
|---|---|
| Real property development | Passive rental only |
| Construction | Hotel employees |
| Reconstruction | Non-real estate work |
| Acquisition | Finance/lending |
| Management | Property appraisal only |
| Leasing | |
| Brokerage |
Suspended Losses
| Situation | Treatment |
|---|---|
| Losses exceed allowance | Suspended (carry forward) |
| Future passive income | Can use suspended losses |
| Fully taxable sale | All suspended losses released |
Form 8582
Form 8582 (Passive Activity Loss Limitations) calculates:
- Total passive income and losses.
- Allowable current-year deduction.
- Suspended losses carried forward.
Reminder: §461(l) Excess Business Loss Applies After §469
Even for a real-estate-professional taxpayer who escapes §469 passive limits, the §461(l) EBL cap still applies at the individual level: $313,000 Single / $626,000 MFJ for 2025 (made permanent by OBBBA). Excess becomes an NOL carryforward.
Real-World Scenario
Scenario: You have $40,000 of rental losses, AGI of $120,000, and actively participate in managing your rental property.
- Phase-out: $25,000 - [($120,000 - $100,000) × 50%] = $25,000 - $10,000 = $15,000.
- Allowable loss: $15,000 against active income.
- Suspended: $25,000 ($40,000 - $15,000) carries forward.
On the Exam
Question types to practice on rental real estate:
- Allowance Questions: "What is the rental real estate loss allowance for active participants?"
- Phase-Out Questions: "At what AGI is the $25,000 allowance fully phased out?"
- REP Questions: "How many hours must a real estate professional work in real estate?"
- Suspended Loss Questions: "What happens to disallowed passive losses?"
The key is to remember: $25,000 allowance for active participants. Phase-out $100k-$150k. REP = 750+ hours and 50%+ in real estate. Suspended losses release on sale.
What is the rental real estate loss allowance for active participants?
$10,000
$15,000
$25,000
$50,000
At what AGI is the $25,000 allowance fully phased out?
$100,000
$125,000
$150,000
$200,000
How many hours must a real estate professional work in real property activities?
250+ hours
500+ hours
750+ hours
1,000+ hours
Sections you finish are checked off in the contents.